Why Your Physician Contract Should Include Tail Coverage

There’s a seismic shift occurring in the healthcare industry and physicians have led the changes in employment models. The corporatization of the medical profession has required many private practice doctors to choose between the steady full-time employment of corporate health systems or an independent small business model with its risk factors and intense competition for patients which is driven largely by health plan referrals.

According to Healthcare Finance, 70% of physicians are employed by hospitals, healthcare systems, and private equity firms, leaving only 30% that practice independently. However, this trend may offer more opportunities for both doctors and patients in the healthcare delivery market.

Physician Migration

A new trend is emerging whereby physicians own their practices and work symbiotically or “partner” with their neighboring Ambulatory Surgery Centers and other ancillary service providers such as imaging centers. In a Becker’s ASC Review article entitled, “What’s driving the next generation of physicians to private practice?”, Twenty-one physicians give their opinions of working in private practice. They state such benefits as:

• Autonomy in clinical decision making
• Revenues from ancillary services
• Flexibility in scheduling to facilitate a work/life balance

Physicians have been calling us for help. Some want to leave the private equity firm or hospital employer and make a fresh start, owning their own practice again. Of course, doing so will require them to purchase a “tail” – insurance coverage during the period following employment that covers new claims made for services performed in the past while covered under a previous policy.

A tail can be 200% of the current rate.

Yikes! This means that you need to understand the precise malpractice insurance coverage terms in your current employment contract. And should you decide to move from one employer to another, or into private practice, make sure you can negotiate the right tail coverage in your policy to assure sufficient protection going forward.

The Need to Negotiate

Physicians who sell their practice to a private equity firm or a healthcare system need to be mindful of the contractual arrangement they make with their new employers. It’s best to consult with a physicians’ attorney who has experience negotiating contract clauses in your favor. Never assume that you will stay in the same position forever. Be aware that you may decide on a different path in the future, and make sure to understand who has responsibility for tail coverage in your insurance policy.

The Right Tail Coverage

You need to put a high priority on tail coverage in your insurance. Any employer or practice buyer will likely add you to their malpractice insurance on a claims-made basis. With a claims-made policy, the trigger date of a claim is the date someone files a lawsuit. This date could be several years after you cancel your coverage. Therefore, if you leave a position, you will likely need tail coverage. As indicated, a “tail” is essentially an Extended Reporting Period that allows you to report claims to the insurance company after the company cancels the policy for professional services you rendered during the policy period.

Here is a sample of a Tail clause in a physician contract:

Reading the “fine print,” you’ll see that if you or your buyer terminate the agreement, you would be responsible for the tail, unless:

1. The cause is death, disability, or retirement after age 65, in which case the insurance company would provide a free tail.
2. The physician moves the coverage to another policy that picks up “Prior Acts” coverage, which is the timeframe when you were added to the policy and then terminated.

Tail Coverage Negotiating Tips

You will be better prepared for career transitions or moves when you have the right facts to help in your employment negotiations. Check out these suggestions from the Total Health | Law Blog when negotiating tail coverage before employment:

Tactic 1: Propose that the responsibility for tail coverage depends on the circumstances around the employment ending.

This tactic requires an understanding of the possible ways the employment could end. Generally speaking, the physician can terminate with or without cause, and the employer can terminate with or without cause. To compromise, each party could assume liability if they (1) terminate without cause or (2) act in a way that allows the other party to terminate for cause. This is a reasonable compromise; it apportions a financial penalty on the party who is at fault for the termination or who terminates with no reason.

Tactic 2: Propose that the physician’s tail coverage responsibility declines over time.

Employers place the burden of tail insurance coverage on physician-employees to reduce the risk and costs of hiring a new physician. Over time, physicians pay for themselves and bring a profit to the practice. Understanding how the employment relationship evolves reveals the next tactic, which varies the parties’ respective cost of tail coverage over time based on the years of employment. The longer the physician is employed, the less responsible the physician is for paying for tail coverage. After a certain number of years, the employer will pay for 100% of the cost of tail coverage. There are numerous ways to construct a tail coverage calendar and deciding on the right approach requires an understanding of the practice’s business model and expectations of the physician.

It’s Never Too Late to Get Help!

Suppose you’ve already signed the contract, worked several years, and are now ready to depart from your employer without retiring. If you are responsible for paying for a tail, I can help you by:

• Verifying that you are responsible for purchasing the tail by reviewing your contract and asking questions about your plans.
• If you are starting a new practice, I can help you transition this coverage onto a new policy that will include proper coverage for your new endeavor.
• If you are responsible for the tail, I can search for competitive options from insurance companies that offer standalone tail coverage.

As always, being informed and planning ahead leads to better results. Understanding how to negotiate tail coverage at the time of your new employment can save you many thousands of dollars.
If you have any questions about tail coverage, feel free to call or text me at (603) 926-1318, or email me at michelle@perronservices.com.

I’m always happy to help doctors be doctors!